Growth of Commercial PACE in California

Property Assessed Clean Energy (PACE) financing of clean technologies is making a comeback by targeting commercial properties. At the end of 2012, San Francisco became the first city to finance a project using commercial PACE. In conjunction with San Francisco’s milestone financing, 14 California counties and 126 cities have launched the nation’s largest commercial PACE program called CaliforniaFirst.

PACE is a financing program where cities or counties allow property owners to pay the financing cost for upgrading their building with clean technologies through property taxes. Qualified improvements covered by PACE include installation of efficiency lighting retrofits, energy/water saving systems and clean tech onsite generation including solar and fuel cells.

PACE was a hugely successful residential program before it was stopped in its tracks when the Federal Housing Financing Authority, along with the Office of the Controller Of The Currency, issued guidance that a PACE program was an involuntary subordination of a mortgage. This guidance effectively threatened the mortgages underwritten by the FHFA for homes that also had PACE financing.

Commercial PACE

Commercial PACE can be successfully financed because commercial buildings do not rely upon the FHFA when financing their mortgages. Through a commercial PACE program, a property owner can obtain a low-cost loan that can be transferred to a new owner if they sell their building. For a city or county, PACE is proven to create economic development including sorely needed construction jobs. A community using a commercial PACE program will benefit from reduced greenhouse emissions and, depending upon the type of investment, improved water conservation.

How commercial PACE is implemented

To learn more about how commercial PACE is being implemented, I interviewed Mahesh Shah, CEO of Fig Tree Energy Financing, just after his company won approval by the City of San Diego to implement a commercial PACE program. Fig Tree’s commercial PACE program provides an approving city like San Diego with a turnkey commercial PACE program. There are no administration costs charged to the city by Fig Tree for implementing the PACE program. All PACE financings are done through non-government sources so the city incurs no PACE-related debt. Fig Tree obtains enabling financing from banks and investors. The company also secures judiciary validation of the program that protects both the city and participating property owners.

For property owners, this is a voluntary program. If one property owner uses PACE it will have zero impact upon the taxes of other property owners. Fig Tree manages the process from application to financing for participating property owners at zero cost to the property owner. Most importantly, Fig Tree obtains approval from the property’s mortgage lender before entering into a commercial PACE loan. One of the innovations being pioneered by Fig Tree is the use of a portfolio loan financing approach that aggregates several commercial PACE transactions into one financing. This portfolio approach enables Fig Tree to offer commercial PACE to smaller businesses seeking financing as low as $5,000.

Bill Roth is an economist and the Founder of Earth 2017. He coaches business owners and leaders on proven best practices in pricing, marketing and operations that make money and create a positive difference. His book, The Secret Green Sauce, profiles business case studies of pioneering best practices that are proven to win customers and grow product revenues. Follow him on Twitter: @earth2017.

First Green Business Coach for Entrepreneur.com. Founder of EARTH 2017, a website posting economic analysis on disruptive trends impacting communities and businesses. President of NCCT, a consulting company that coaches CEOs and business owners on pricing and marketing best practices proven to win the millennial generation, and their moms, as customers.